LOVELY PROFESSIONAL UNIVERSITY HOME WORK: 3 Lovely School/Institute of Name of the faculty member: Rohit Vij Course No:

MGT 333 Class: E3001 Max. Marks: 15 (10+5)

Form/LPUO/AP-3

Department of Management Course Title: Basic Financial Management Date of Submission: 1-Apr-2011

Note: Class Test of 10 marks shall be conducted based on this assignment in tutorial after submission. Answer all Questions: PART A
Q1: Fitwell Company is now capitalized with Rs. 50,00,000 consisting of 10,000 ordinary shares of Rs. 500 each. Additional finance of Rs. 50,00,000 is required for a major expansion programme launched by the company. Four possible financing plane are under consideration. These are: Entirely through additional share capital, issuing 10,000 shares of Rs. 500 each. Rs. 25 lakhs through ordinary shares and Rs. 25lakhs through 12% debt. Entirely through 13% debt. Rs. 25 lakhs through equity and Rs. 25lakhs through 10% preference shares of Rs. 500 each. The companys EBIT presently is Rs. 6lakhs. By virtue of the increase in capitalization, the EBIT is expected to double the present level.

Examine the impact of financial leverage of these four plans and calculate the EPS for the shareholders, assuming the tax rate to be 50%. Q2:A company needs Rs. 12,00,000 for the installation of a new factory, which would yield an annual EBIT of Rs. 200,000. the company has the objective of maximizing the EPS. It is considering the possibility of issuing equity shares plus raising a debt of Rs. 200,000, Rs. 600,000 or Rs. 10,00,000. The current market price per share is Rs. 40 which is expected to drop to Rs. 25 per share if the market borrowings were to exceed 750,000. Cost of borrowings are indicated as under: Up to Rs. 250,000 10%p.a Between Rs. 250,001 and Rs. 625000 14%p.a Between Rs. 625,001 and Rs. 10,00,000 16%p.a Assuming tax rate to be 50% work out EPS in each case and suggest the best option.

Q3: Companies X and Y are identical in all respects including risk factors except for debt/equity, X having issued 10% debentures of Rs.18 lakhs while Y has issued only Equity. Both the companies earn 20% before interest and taxes on their total assets of Rs.30 lakhs. Assuming tax rate of 50% and capitalization rate of Rs.15% for an all equity company, compute the value of companies X and Y using (i) net income approach and (ii) net operating income approach.

PART B
Q4: The Evergreen Company has the choice for raising an additional sum of Rs.50 lacs either by the sale of 10% debentures or by issue of additional equity shares at Rs. 50 per share. The current capitalization structure of the company consists of 10 lacs ordinary shares and no debt. At what level of earnings before interest and tax after the new capital is acquired, would EPS be the same whether new funds are raised either by issuing ordinary shares or by issuing debentures? Assume tax rate at 50%. Q5: ABC ltd wants to raise Rs. 100 lacs for a diversification project. Current estimate of earnings before interest and tax from the new project is Rs.22 lacs per annum. Cost of debt will be 15% for amounts upto and including Rs. 40 lacs ,16% for additional amounts upto and including Rs. 50 lacs and 18% for additional amounts above Rs.50 lacs. The equity shares(face value Rs.10) of the company have a current market value of Rs.40. This is expected to fall to Rs.32 if debts exceeding Rs.50 lacs are raised. The following options are under consideration of the company: OPTION I II III EQUITY 50% 60% 40% DEBT 50% 40% 60%

Determine the EPS for each option and state which option the company should exercise. Tax rate is 50%. Q6: A company has a share capital of Rs,100000 divided into shares of Rs.10 each. It has major expansion programme requiring an investment of Rs.50000. The management is considering the following alternatives for raising this amount: 1 Issue of 5000 shares @10 each 2 issue of 5000, 12% preference shares @10 each 3 Issue of 10% debentures of Rs.50000 The companys present EBIT is Rs. 30000 p.a.. You are required to calculate the effect of each of the above modes of financing on the EPS presuming (a) EBIT continues to be the same even after expansion

(b) EBIT increases by Rs. 10000 (c) Assume tax rate of 50%

Note : Assignment will not be accepted after the date of Submission and Zero marks will be awarded. Date: Remarks by COD-F (Mandatory) Sig. of COD-F with date Remarks by COS-F (Mandatory) Sig. of Faculty member

Sig. of COS-F with date